This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, January 26, 2009

Predictions for 2009

We began the tradition several years ago that each year on the radio we give our broad predictions for the market and the economy for the following year. The following are our predictions for the 2009 fiscal year.

  • The stock market, a leading economic indicator, will have a strong first quarter or quarter-and-a-half. After a recovery the market will trade within a range for the balance of the year.

  • The overall economy will begin to see improvement by mid-summer, led by real estate. With low gas prices and cheap financing, manufacturing shouldn’t have a problem picking up once consumer confidence stabilizes.

  • We believe that the real estate market is currently at or very near its bottom for price declines. Mortgage rates are at all-time lows, which will help the sector recover. With prices 40 percent off their highs and mortgage rates under 5 percent, there is absolutely no better time for buying a home.

  • We maintain our stance that inflation is going to be the problem in 2009 as the economy begins its recovery. The Fed has created massive amounts of money by expanding its balance sheet, but velocity is still so low that the public hasn’t seen this cash. When velocity does pick up, inflation will go on a tear. Unlike the Depression, everyone is going to have money. The question is what it will buy.

  • Employment, being a lagging indicator, probably will not begin to recover until after the economy as a whole. It may see some improvement in late 2009.

  • Oil prices, having reached unsustainable lows, will trend higher over the next year. Crude oil prices have been driven lower through speculative futures trading. It was this same speculation, oddly enough, that drove oil all the way up to $140/barrel just mere months ago. We see $2/gallon as a reasonable average price of gas for 2009 after the market resumes some degree of normalcy.

  • Interest rates will begin to rise as the economy recovers and the Fed is forced to try to rein in the inflation that will be ripping through the global market. Unfortunately, the policy of free money can’t be long maintained without serious consequences.

  • The worst investment that we see for 2009 is in treasuries. With yields at historic lows, having gone negative on several occasions in short term bills, prices have nowhere to go but down as investors begin to take notice of inflation and bargains to be had in the stock market and oversold corporate debt.

This past year has been an abysmal year for everyone, and we are all too happy to put it behind us and look to the future. There are some very interesting changes taking place in the investment world, and there is plenty of money to be made by those who do their homework. We believe that gone are the times when investors could pick stocks from a hat, buy on Monday, and wait until Friday to tally their profits. The old saying goes “Never confuse brains with a bull market,” and the coming times will certainly separate the brains from the bull. The name of this new game is diligence.

Sunday, January 25, 2009

Protect yourself against fraud

If you listen to our radio spots, you are well aware of the stream of fraud cases that have come out recently. Most notably is former NASDAQ chairman Bernard Madoff’s Ponzi scheme that may have cost investors as much as $50 billion.

Then there’s the case involving Marcus Schrenker, an Indiana investment manager who faked his own suicide when he parachuted from his plane that crashed in Florida. Sarasota, Fla.-based hedge fund manager Arthur Nadel, who reportedly owed $50 million to investors, also disappeared. His car was found at the airport after he had apparently threatened to kill himself. Finally, lest we forget Sam Israel, the hedge fund manager who was convicted this summer of stealing $450 million from investors, only to fake his suicide. If you recall, Israel left his car on a bridge in upstate New York, along with a suicide note and then went on the run, only to be found three weeks later.

Relatively speaking, losses aren’t nearly as bad as fraud. When investors suffer losses, they can generally recover, given enough time and the right advice. In cases of fraud, more often than not, investors are left with nothing and are forced to completely start over. And while many brokers are members of an insurance agency called Securities Investor Protection Corporation (SIPC), which provides limited coverage against fraud and theft, not all securities professionals are members. What’s worse, if a so-called professional is willing to steal client money, is it too much to think he or she would falsely claim SIPC membership? Investors need to know how to protect themselves from cases of fraud. To help investors recognize potential wrongdoing, we’ve compiled a short list of red flags that should sound the alarm that all may not be right. They are as follows:

• Lack of transparency. This is most common among hedge funds. Examples include a financial adviser not periodically sending confirmations or statements, being hard to reach or delaying account redemptions for longer than a few days.

• Returns that are too consistent. In the Madoff case, investors were told they were earning 8 percent a year, regardless of market conditions. This simply isn’t possible. While a fund manager may average 8 percent, or even more, over several years, seeing the same returns year after year ought to be cause for second thoughts.

• Ability to get physical possession of funds, other than for fees. In all the cases listed, investment managers had direct physical possession of client assets, or could easily obtain possession. Investors are better protected when advisers use an independent third party as a custodian, as is the case with mutual funds.

Sunday, January 18, 2009

Black Swan event isn’t pretty

The events leading to this financial crisis, in retrospect, appear to be something of a perfect storm. When examined individually, they seem relatively probable, but for all to occur in such conjunction as to cause the meltdown that we’ve witnessed, the probability is infinitesimally small. Before their occurrence, these events weren’t thought by possible by most people. In fact, they weren’t even conceived of. This is the definition of a Black Swan event. For those unfamiliar with the term, it is discussed at length in Nassim Taleb’s new book, “Black Swan: The Impact of the Highly Improbable.”

Fitting Taleb’s definition of a Black Swan, at the beginning of this crisis people underestimated the impact of negative events. Everything was downplayed as simply a pause in the upward trends of the stock market and broader economy. Now that most of these events have played out and their impact has been felt, many journalists and so-called professionals are extrapolating recent downtrends indefinitely into the future. The fact is that Black Swan events are typically years in making and, once a threshold is crossed, have quick, significant impacts.

We must remember the extreme improbability of events in recent months ever occurring. Now that we’ve seen this sequence of events once, it is even less likely that we will see the same, or even similar, events unfold. And while they may sometime way down the road, it almost certainly won’t happen again, not in the lifetime of anyone who remembers this latest financial crisis. However, it is important to recognize the self-fulfilling prophecies that may come to pass out of fear.

The government can invent bailout plans forever, but the only thing that is going to get us out of this mess is confidence. Confidence that you aren’t going to lose your job and that we aren’t going into a depression; and once banks share this confidence, they will have the assurance they need to lend money so the financial system can get moving again. All of this is admittedly hard amid the recent news, which is almost enough to put a person in therapy. The only thing we can do is have faith, count our blessings, and keep on keepin’ on.

Sunday, January 11, 2009

Political beliefs aside, managing money is priority

In less than two weeks, we will witness the recurrence of an event that over its two centuries of history has helped make this country great: the peaceful transfer of power. When we step back and survey other countries around the world, from Cuba and Venezuela to Zimbabwe and Pakistan, many are marked with political unrest that often erupts in violence. While many Americans may disagree with U.S. foreign relations at present, it is an important note that we do not suffer such turbulence at home.

From a financial perspective, this leads into a critical task for money managers: separating personal beliefs from financial interest. For example, my father and I consider ourselves mostly conservative with libertarian tendencies. So it may come as no surprise that we were not to be seen out supporting Barack Obama. However, we have learned to forget our own ideologies when it comes to managing money. With the election decided, there will undoubtedly be some people who choose to complain for the next four years regardless of the outcome. We feel, however, that this is far from ours and our clients’ best interests.

Our job as money managers, under our system of managing money, is simple: To examine current economic and geopolitical circumstances; determine what fiscal and monetary policies will be pursued in Washington; and decide which investments will benefit most from those policies. We have made clients money under ever president from Carter to Bush No. 2, and everyone in between (without exception). Our duty to our clients gives us a near-mercenary mentality. While we hold true to our beliefs, we compartmentalize them in order to serve our clients’ interests objectively and (hopefully) effectively.